I'm still amazed that President Clinton has taken not a single shot (that I'm aware of) for his part in the sub-prime mortgage debacle and subsequent credit meltdown. Wasn't Reagan the Teflon president, or was it Clinton? I think they both have that property. I tag Clinton with a lot of the blame for the sub-prime situation. He pushed aggressively for the Carter-era CRA to be strengthened and extended. This is noted elsewhere, including my first entry on this blog.
Also, the cosy, corrupt (IMO), and ultimately very damaging relationship between congressional democrats and Fannie Mae and Freddie Mac was extended and deepened through the Clinton years. And this component of the debacle ultimately makes sense. If a lot lousy mortgages are being created, then some party needs to buy 'em so still more can be created. Only after all this was in motion, did Wall Street firms create the derivatives, swaps, and other instruments that spread the bad-mortgage disease around the world. If President Clinton didn't want the relationship and doings at the GSEs to continue, they wouldn't have.
President Bush knew about it and tried to stop it on a few occasions in his first term. But instead he's tagged with blame in the mortgage problem, to my complete bewilderment. Republicans can be blamed for feeble and ineffective communication - of that I'm sure.
A net result of all this was discussed today on CNBC. What's really the market cap of the big banks affected by this? Some say it's essentially zero. It's certainly only a fraction of what it was. Where did it go and who owns the spoils? To the degree that the bad loans created a non-wealth bubble, this "bad air" was sucked into the banks and canceled out value. Thanks for the market distortion, President Clinton. Now we public (taxpayers) own a sizable chunk of the banks' remaining market cap.
The entire issue is a cause of serious concern for anyone who cares about undistorted, free markets. I'm angry. Remember Earl Pitts? "Why I'm so angry, I could......"
Thursday, February 5, 2009
Friday, January 30, 2009
Obama Starts Down the Dreaded Path
Here a some beefs I have with President Obama's and the Democratic majority's recent actions and positions.
1) The so-called stimulus bill is full of pork. I'm hearing about more items all the time that sound more like ornaments on a Christmas tree of pork than elements of a well-thought-out and effective stimulus bill.
2) The stimulus bill is too light on tax cuts and too heavy on spending. I'll detail why tax cuts are more effective in a later post.
3) The Columbian Free Trade Agreement isn't passed yet. Remember this? It still matters. The U.S. so far has failed to lock in free trade and economic recovery advantages and the drug war advantages of passing the FTA. Stratfor and other sources have warned about Mexico's dire straits. We need to watch our southern border closely.
4) There's a "buy American" clause in the stimulus bill. It's nonsense to codify that in a bill. If a private party wants to pursue a buy America ad campaign that's fine. But massive sellers of treasury notes and the beacon of democracy and free markets, not to mention chief advocate of free trade, can ill afford to do this. It's stupid and economically wrong.
5) The Obama administration naively stated the obvious about China's handling of its currency relative to the dollar. Of course they manipulate it. It's officially pegged, after all. It doesn't even pretend to float in a free market relative to the dollar. But it was a stupid thing to say so. To do so within a week of the passage of a giant spending bill to be financed by government borrowing was a whopper. The Chinese have good reason to fear sanctions and legal consequences if what they are doing is called what it is. And of course a backlash to those actions would hit us. Hard. Please guys, try to act sophisticated even if you aren't. The U.S. and China are in a dance together and it will take at least another generation to unwind things enough to be free-market rational.
6) The "Card Check" pro-union bill lurks in the halls of congress. The election mechanism is un-American and I would think it would be unconstitutional. I'd have to look. The bill will also advance the government's role from referree to dictator of terms after a set time period of negotiations between a company and a union. That's bad on several levels. More on this later. For some detail see today's editorial page in Investor's Business Daily.
7) Obama signed the "Lilly Ledbetter" bill. That's a bill that sounds appealing to people who think with their hearts instead of their brains. But it sets up some incentives and legal mechanisms which will be abused, to the short-term detriment of businesses and the long term detriment of employees.
8) Closing Gitmo? Dumb. Castro's already making hay, and that's before we've let anybody out! We close Gitmo and celebrate only after we're out of Iraq and Afghanistan, UBL is proven dead, al Queada is discredited and dismantled, Iran has been shorn of nukes, the Isreal-Palestinian question has been resolved to the degree that Palestinians move forward economically instead of work to dismantle the present situation, and Hamas and Hesbollah in their present forms are nothing but bitter memories.
My relief at the perceived quality of Obama's cabinet picks is giving way to the forlorn environment I feared before Obama was elected.
1) The so-called stimulus bill is full of pork. I'm hearing about more items all the time that sound more like ornaments on a Christmas tree of pork than elements of a well-thought-out and effective stimulus bill.
2) The stimulus bill is too light on tax cuts and too heavy on spending. I'll detail why tax cuts are more effective in a later post.
3) The Columbian Free Trade Agreement isn't passed yet. Remember this? It still matters. The U.S. so far has failed to lock in free trade and economic recovery advantages and the drug war advantages of passing the FTA. Stratfor and other sources have warned about Mexico's dire straits. We need to watch our southern border closely.
4) There's a "buy American" clause in the stimulus bill. It's nonsense to codify that in a bill. If a private party wants to pursue a buy America ad campaign that's fine. But massive sellers of treasury notes and the beacon of democracy and free markets, not to mention chief advocate of free trade, can ill afford to do this. It's stupid and economically wrong.
5) The Obama administration naively stated the obvious about China's handling of its currency relative to the dollar. Of course they manipulate it. It's officially pegged, after all. It doesn't even pretend to float in a free market relative to the dollar. But it was a stupid thing to say so. To do so within a week of the passage of a giant spending bill to be financed by government borrowing was a whopper. The Chinese have good reason to fear sanctions and legal consequences if what they are doing is called what it is. And of course a backlash to those actions would hit us. Hard. Please guys, try to act sophisticated even if you aren't. The U.S. and China are in a dance together and it will take at least another generation to unwind things enough to be free-market rational.
6) The "Card Check" pro-union bill lurks in the halls of congress. The election mechanism is un-American and I would think it would be unconstitutional. I'd have to look. The bill will also advance the government's role from referree to dictator of terms after a set time period of negotiations between a company and a union. That's bad on several levels. More on this later. For some detail see today's editorial page in Investor's Business Daily.
7) Obama signed the "Lilly Ledbetter" bill. That's a bill that sounds appealing to people who think with their hearts instead of their brains. But it sets up some incentives and legal mechanisms which will be abused, to the short-term detriment of businesses and the long term detriment of employees.
8) Closing Gitmo? Dumb. Castro's already making hay, and that's before we've let anybody out! We close Gitmo and celebrate only after we're out of Iraq and Afghanistan, UBL is proven dead, al Queada is discredited and dismantled, Iran has been shorn of nukes, the Isreal-Palestinian question has been resolved to the degree that Palestinians move forward economically instead of work to dismantle the present situation, and Hamas and Hesbollah in their present forms are nothing but bitter memories.
My relief at the perceived quality of Obama's cabinet picks is giving way to the forlorn environment I feared before Obama was elected.
Wednesday, January 28, 2009
A Skating Rink Guides Regulatory Reform
The issue of market regulation reform lurks behind the automaker bailouts and the stimulus packages. Social engineering is to regulation reform as pork spending is to stimulus packages. Both social engineering and pork should be avoided.
Contemplating an ice skating rink may help guide the philosophy shaping regulatory reform, especially of financial markets. An ice rink is flat, as a level regulatory playing field or market should be. The rink has walls, which define the limits of the playing surface. The rink doesn't limit how fast skaters can skate. Instead they must suffer any negative consequences of their own risk-taking. No one is preselecting winners or losers in the competition.
To stretch the analogy a large step further, unless someone provides the skating rink, the skaters would be skating out on a parking lot. The irregular surface with no boundaries is not conducive to efficient skating. The lack of boundaries and level playing surface enables skaters to pull dirty tricks on each other with impunity.
This philosophy applied to financial markets regulation suggests tranparency, good reporting, open price discovery, and regulated exchanges for all large markets. Credit Default Swaps and Collateralized Debt Obligations should be regulated this way. That's especially true if the Financial Accounting Standards Board holds to its mark-to-market accounting rule. The mark-to-market accounting rule applied to private, over-the-counter CDS market proved to be a dangerous combination when the markets began to seize up. In fact, some who know more about this than I do posit this as a key cause of the seize-up.
Contemplating an ice skating rink may help guide the philosophy shaping regulatory reform, especially of financial markets. An ice rink is flat, as a level regulatory playing field or market should be. The rink has walls, which define the limits of the playing surface. The rink doesn't limit how fast skaters can skate. Instead they must suffer any negative consequences of their own risk-taking. No one is preselecting winners or losers in the competition.
To stretch the analogy a large step further, unless someone provides the skating rink, the skaters would be skating out on a parking lot. The irregular surface with no boundaries is not conducive to efficient skating. The lack of boundaries and level playing surface enables skaters to pull dirty tricks on each other with impunity.
This philosophy applied to financial markets regulation suggests tranparency, good reporting, open price discovery, and regulated exchanges for all large markets. Credit Default Swaps and Collateralized Debt Obligations should be regulated this way. That's especially true if the Financial Accounting Standards Board holds to its mark-to-market accounting rule. The mark-to-market accounting rule applied to private, over-the-counter CDS market proved to be a dangerous combination when the markets began to seize up. In fact, some who know more about this than I do posit this as a key cause of the seize-up.
Monday, December 1, 2008
We Shouldn't Bail Out the Big 3 Automakers
The government should not bail out the car companies. Their business model and their agreements with their workers unions have become non-competitive. A bailout will simply push bankruptcies into the future. And at that time the unfunded obligations will be bigger than today.
I have a deep affection for cars, and high on my list are American muscle cars. I also like vintage American cars, lowriders, and racing cars. I don't own any of these, but I love 'em. I love the sound and power of an American V8. I saw CanAm races at Riverside, and there I heard how engines really sound.
But none of the glorious past changes the sorry state of the industry today. The union agreements and the silly CAFE rules act as a scissors to cut profit out of the industry. The union agreements boost costs, so the big three built trucks and SUVs, which were most profitable. The CAFE rules forced unprofitable fleet allocations. The spike in gasoline prices revealed that the whole arrangement was untenable.
Studying economics in college, I asked whether an antitrust case could be brought against a union that represents workers for an entire industry, encompassing several companies. The answer is no, unions are exempt from antitrust cases, not matter what. I never bought that concept. It always seemed logical to me that a union might represent one of the big 3 automakers, for example, but different unions would have to represent workers in the others. That way, essentially the unions have to compete to make reasonable deals. A company could be taken down, but an industry would be less likely. I've read articles over the years after a new UAW contract is cut with one automaker, in which the dire warning is sounded for the prospects of the other two.
Naturally enough, the Democrats, with their union support, are for the bailout. If anything, their restraint and reasonableness is surprising. But bankruptcy is the best option if cash runs out. Contrary to fearful reports, a bankrupt automaker will not cease to exist. It will reorganize its obligations and carry on. And that is exactly what is needed.
A friend asked me about all the past workers' pensions and health coverage if one goes bankrupt. I said "Exactly." Instead of a person retiring at age 65 and and dying at 72 as in past years, a person may now retire at 55 and live until 82. How can a company be expected to carry that? If the real issue is people who no longer actually work at the Big 3, let's address that directly.
The UAW is now, suddenly, talking about renegotiating some parts of their agreements. It's too late. I say "No Deal." By the way, CAFE requirements should not exist. The fuel efficiency of cars and trucks is something the market should decide.
Please read my first post below. That's where I lay out the basic free-market vs. Socialism logic.
I have a deep affection for cars, and high on my list are American muscle cars. I also like vintage American cars, lowriders, and racing cars. I don't own any of these, but I love 'em. I love the sound and power of an American V8. I saw CanAm races at Riverside, and there I heard how engines really sound.
But none of the glorious past changes the sorry state of the industry today. The union agreements and the silly CAFE rules act as a scissors to cut profit out of the industry. The union agreements boost costs, so the big three built trucks and SUVs, which were most profitable. The CAFE rules forced unprofitable fleet allocations. The spike in gasoline prices revealed that the whole arrangement was untenable.
Studying economics in college, I asked whether an antitrust case could be brought against a union that represents workers for an entire industry, encompassing several companies. The answer is no, unions are exempt from antitrust cases, not matter what. I never bought that concept. It always seemed logical to me that a union might represent one of the big 3 automakers, for example, but different unions would have to represent workers in the others. That way, essentially the unions have to compete to make reasonable deals. A company could be taken down, but an industry would be less likely. I've read articles over the years after a new UAW contract is cut with one automaker, in which the dire warning is sounded for the prospects of the other two.
Naturally enough, the Democrats, with their union support, are for the bailout. If anything, their restraint and reasonableness is surprising. But bankruptcy is the best option if cash runs out. Contrary to fearful reports, a bankrupt automaker will not cease to exist. It will reorganize its obligations and carry on. And that is exactly what is needed.
A friend asked me about all the past workers' pensions and health coverage if one goes bankrupt. I said "Exactly." Instead of a person retiring at age 65 and and dying at 72 as in past years, a person may now retire at 55 and live until 82. How can a company be expected to carry that? If the real issue is people who no longer actually work at the Big 3, let's address that directly.
The UAW is now, suddenly, talking about renegotiating some parts of their agreements. It's too late. I say "No Deal." By the way, CAFE requirements should not exist. The fuel efficiency of cars and trucks is something the market should decide.
Please read my first post below. That's where I lay out the basic free-market vs. Socialism logic.
Thursday, November 13, 2008
What’s the root cause of the sub-prime and credit debacle?
In the present housing and credit market problem sets, there has been limited commentary about the root causes and in my view over half of it has been completely distorted. The problem’s root cause is a market distortion caused by the government encouraging the residential real estate industry to get a higher percentage of Americans into home ownership. I recall reading about President Carter’s CRA and later about the ramp-up of this initiative in the 1990s. By 1996 this had resulted in President Clinton’s “National Partners in Homeownership” initiative, and a dramatic strengthening of the CRA.
How would this have worked if viewed from a market perspective? If the residential real estate market was generally at equilibrium before the government started this initiative, then who was there to find to increase the percentage of home ownership? Less credit-worthy borrowers was the only place to look. There was almost certainly not a meaningful percentage of Americans who could easily qualify to buy a house who had chosen instead to rent out of ignorance. The “secret” of the advantages of homeownership was pretty well out by the 1990’s. While financial education and increasing prosperity resulting in more homeownership are laudable goals, I lay root responsibility for the housing debacle on the government. And this is before any discussions of mortgage lending regulations and Freddie Mac and Fannie Mae, and cross-incentives at work between those GSEs and members of Congress.
As the finger-pointing continues over our present problems there are plenty of parties to take the blame. The mortgage industry got creative and sold loans to people who shouldn’t have taken them. Home builders make money by building and selling homes, and were happy to fuel the boom. Realtors and real estate commentators fed the frenzy. Buyers can be excused for financial ignorance only so far. The housing market expansion took on a life of its own. We couldn’t have expected a mortgage lender or broker to be happy reporting lower sales numbers in the middle of a boom, even when the supply of reasonable marginal borrowers was getting thin. But I return to the idea that the original instigation was a market distortion started by the government. The initiative to raise the percentage of American homeowners was good as a starting concept, but very harmful when it devolved into putting unqualified buyers into homes who couldn’t afford them in the long term. And we all can see that now.
Monday, November 10, 2008
Why the "Old Fashioned" Title
This blog's title is as it is half as a joke, and half with serious intent. I recall the famous old Smith Barney ad, in which John Houseman says "“We make money the old-fashioned way. We EARN it.” I thought that was so cool the title just wrote itself. That ad was broadcast so long ago it will probably be very obscure to almost anyone under 40. But hey, I remember it like yesterday.
The point of the ad was that Smith Barney was rooted in the basics, and wasn't going in for all the swingin' financial engineering that was taking customers' money and getting people into trouble. And that was before anyone had heard of the fancy financial instruments that are causing so much trouble now.
The serious side is trying to make the point that the fundamentals of economics and Capitalism may seem old fashioned, but in fact they apply just as well today as ever. It occurred to me after I published that "Old Fashioned" must seem doubly quaint when the winning campaign was dressed in the cloak of newness and change.
I do not believe that anything really new has been proposed. This term will likely be a case of "the more things change, the more they stay the same". If I'm correct those who remember Johnson's Great Society and Carter's malaise will be drawing comparisons. Those who can remember the Great Depression as adults are getting fewer. But we can all hope that as Chairman Bernanke compares the statistics the coming period won't too closely resemble it.
I must be in a bit of a dour mood today. Here's some positive spin. Today I remembered again that a few short weeks ago we were looking squarely into the eyes of a meltdown of the world financial system and possible return to the financial stone age - as least from the perspective of the global economy. Today we're only discussing the length and depth of the recession. How's that for positive?
The point of the ad was that Smith Barney was rooted in the basics, and wasn't going in for all the swingin' financial engineering that was taking customers' money and getting people into trouble. And that was before anyone had heard of the fancy financial instruments that are causing so much trouble now.
The serious side is trying to make the point that the fundamentals of economics and Capitalism may seem old fashioned, but in fact they apply just as well today as ever. It occurred to me after I published that "Old Fashioned" must seem doubly quaint when the winning campaign was dressed in the cloak of newness and change.
I do not believe that anything really new has been proposed. This term will likely be a case of "the more things change, the more they stay the same". If I'm correct those who remember Johnson's Great Society and Carter's malaise will be drawing comparisons. Those who can remember the Great Depression as adults are getting fewer. But we can all hope that as Chairman Bernanke compares the statistics the coming period won't too closely resemble it.
I must be in a bit of a dour mood today. Here's some positive spin. Today I remembered again that a few short weeks ago we were looking squarely into the eyes of a meltdown of the world financial system and possible return to the financial stone age - as least from the perspective of the global economy. Today we're only discussing the length and depth of the recession. How's that for positive?
Thursday, November 6, 2008
Congratulations on Election Victory
It's Thursday and I'm pretty much done crying in my beer about Barack Obama and his team winning the election. I congratulate Mr. Obama and his campaign people. It's clear they ran an effective and organized campaign. If they are as smart in running the executive branch and dealing with the Congress everything will be OK. And that's even from a markets and Capitalism point of view.
It seems to me the election winners would have been the same even if none of the rumored irregularities around the edges with with ACORN and anonymous illegal campaign contributions turn out to be true. But we will only know about this in time, after the research is done, any court cases are settled, and the books come out chronicling the campaigns.
We will also see how deep runs the international affection for President-Elect Obama. He gets his first Presidential level security briefing today. I said to someone before the election that getting that first briefing would probably be an opinion-changing experience for most people. I'll be watching for any changes in what President-Elect Obama has to say about the international scene.
It seems to me the election winners would have been the same even if none of the rumored irregularities around the edges with with ACORN and anonymous illegal campaign contributions turn out to be true. But we will only know about this in time, after the research is done, any court cases are settled, and the books come out chronicling the campaigns.
We will also see how deep runs the international affection for President-Elect Obama. He gets his first Presidential level security briefing today. I said to someone before the election that getting that first briefing would probably be an opinion-changing experience for most people. I'll be watching for any changes in what President-Elect Obama has to say about the international scene.
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